Saving for Retirement Without a Company Pension Plan

Many years ago, most full-time employees had company pension plans that they could count on. People knew that, if they worked at their job long enough, they would be able to retire comfortably around age 65. However, that isn’t the case for many people today.

Even among those who do receive company pension plans, most plans these days tend to be group RRSPs or defined contribution plans, rather than defined benefit plans (which tend to be more secure as pension payments are calculated by length of service and salary earned at the time of retirement).

Plus, many more people are working freelance or contract jobs, are self-employee or are running small businesses. These jobs rarely come with any sort of pension plan.

Government benefits such as the Canada Pension Plan (CPP) and Old Age Security (OAS) are generally not enough on their own for most to retire, which means that many people will struggle to have enough money saved in order to retire comfortably.

A 2016 study from the Broadbent Institute found that only about 15 to 20 percent of middle-income Canadians retiring without an employer pension plan have saved enough for retirement. The study included Canadians between the ages of 55 and 64, meaning people who are likely within 10 years of retirement.

Everyone stops working eventually, either by design or due to various other factors. For most people, this time has traditionally been around age 65. Since the average life expectancy in Canada is about 82 years, that means almost 20 years of a person’s life are spent without any employment income. The only income will be from their pension plans and investments.muhamm In fact, half of Canadians aged 20 today are expected to live to age 90 while 10 percent are expected to reach their 100^th birthday.

Increasing lifespans combined with decreasing pensions means that people will need to put aside more for retirement.

The amount needed for retirement will depend on many factors, including how much you expect to spend during retirement, the assets you will hold when you retire (such as your home), and whether you want to spend all of your money while you’re alive or if you’d like to leave something for your children or other family members.

The actual amount that you will need to put away each month will also depend on your current age and how far away you are from retirement.

The earlier you start saving, the less you will have to put away each month. This isn’t only because you have more time to save, but also because you will earn more interest on your savings the longer you save.

The Canadian government encourages individual savings by allowing a tax deduction for contributions to RRPS’s. For 2016, Canadians were legally able to contribute up to 18% of their income to an RRSP or defined contribution plan and their taxable income was reduced by the amount of the contribution. Unused RRSP contribution room can be carried forward to future years. However, contributing the maximum amount each year can be very challenging for many people.

As for the overall amount that you will need to retire, most experts suggest that couples can live off of 50 to 60 percent of their pre-retirement income while a single person will likely need between 60 and 70 percent. This assumes that you will have no mortgage or child costs in your retirement.

As mentioned, the earlier you start saving for retirement, the less you will have to save as you’ll be able to earn more interest on your savings. Even a small amount put aside in your 20s or 30s will be better than a larger amount saved in your 50s.

Don’t forget to include “retirement savings” as an item in your budget. Just the simple act of putting some money towards retirement every month will help you prepare for when you’re no longer working.

It’s easy to forget about retirement savings, so automate the process. Have your bank (or your employer, if possible) automatically funnel some money directly into your retirement savings account every two weeks or every month. You’ll eventually forget this money exists and you won’t even miss it, since you won’t see and won’t have a chance to spend it.

Even small spending cuts can help you increase your retirement savings if you start early and save frequently. For example, if you skip buying coffee out and instead put that money into a retirement savings plan, you could save $40 a month ($2 per workday equals $10 a week or $40 a month). The same can be said for making meals at home instead of eating out. Even if you only save $10 a week doing this, that’s another $40 a month. Now you’re up to $80 a month that you can put aside for retirement. Even without doing anything else, you’re now at $960 a year in extra retirement savings.

The more cuts you can make, the more you can save.